Source: Global Times Published: 2024-07-05

By Chu Daye

A reported move by the People's Bank of China (PBC) to enter into borrowing agreements with commercial banks has indicated policymakers' willingness to expand toolkit to maintain bond market stability, Chinese analysts said on Friday.

The PBC, China's central bank, has entered into agreements with several major financial institutions to borrow treasury bonds held by these institutions, the Securities Times reported on Friday. The amount of lendable medium- and long-term treasury bonds held by these financial institutions is in the range of several hundreds of billions of yuan, according to the report.

The central bank will borrow treasury bonds without fixed terms and continue to borrow and sell the borrowed treasury bonds according to bonds market conditions, the report went on to say.

The report came after the PBC announced on July 1 its plans to conduct treasury bond borrowing operations with primary dealers in the open market.

Experts said the move signals the central bank's plan to address the overheated bond market to ensure its smooth operation and help stabilize the market by managing the expectations of market participants.

As investors pour their money into the domestic bond market, yields have come under pressure. China's 10-year treasury bond yield has dropped below the symbolic 2.3 percent level, according to Reuters. The 30-year bond yield has slid below 2.5 percent, attracting significant market attention.

Yields for both the 10-year and 30-year bond posted a rise on Friday.

China's central bank has repeatedly warned about the risk of low yields on medium- to long-term treasury bonds since April.

Pan Gongsheng, governor of the PBC, in June at the 2024 Lujiazui Forum emphasized the importance of maintaining a normal upward-sloping yield curve to preserve market investment incentives.

Analysts said the details revealed by the report, including the planned borrowing scale, is a follow-up on the July 1 notice. And it showed that the PBC is also aiming to limit speculative activities in the treasury bond market, they noted.

The move by the central bank could reshape market expectations by increasing the supply of bonds available for purchase on the market, avoiding the risks from ultra-low bond yields, Wang Peng, an associate research fellow at the Beijing Academy of Social Sciences, told the Global Times on Friday.

"The report indicates the PBC is moving ahead in its preparation in engaging in borrowed bond trading," Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at the Renmin University of China, told the Global Times on Friday.

The method is a new way for the PBC to manage liquidity on the open market, Dong added.

The central bank is working with the Ministry of Finance to include treasury bond trading in its open market operations, Pan said, noting that the process will be a gradual one.

According to Pan, incorporating treasury bond trading into the monetary policy toolkit aims to serve as a channel to increase the monetary base and manage liquidity, and this approach involves both buying and selling bonds.